Tank Commander

We spend a lot of time talking about the San Francisco housing market, and rightfully so: it’s a microcosm of all that is wrong with restrictive zoning in closed-access US cities and the poster child for NIMBY obstructionism. As such, San Francisco has managed to overshadow another North American market that is incredibly expensive and getting worse: Vancouver, B.C.

Year-over year, Vancouver’s benchmark housing price index is up 30% to just under $900k while single family detached house prices increased a whopping 40% to $1.374MM (in U.S. dollars) in a city where median household income is around $67k in U.S. dollars – San Francisco is in the $82k range. So how does an MSA with such a low median household income (one of the lowest of major Canadian cities) end up with a median home price that is among the highest?

1) Massive levels of housing demand from wealthy foreign investors, especially from China; and 2) Highly restrictive zoning that makes it difficult to add enough housing units to satisfy that demand. One critical distinction between S.F. and Vancouver is that many of Vancouver’s foreign purchases appear to be for investment purposes only while S.F. real estate has clearly benefited from the tech boom and its highly compensated workforce. This, combined with the inability to build enough new units for residents, is leaving Vancouver with empty units that transact for nosebleed prices. The increase in value was so extreme last year that at least one mathematician estimated that the rising land value of single-family homes accounted for more than the entire employment income in the City of Vancouver –and now more than 90% of detached houses there are worth over $1MM.

Foreign buyers have come under increasing scrutiny of late for the impact that they are having on the world’s most expensive real estate markets. Some of it is justified. For example, the U.S. Treasury department now requires that title insurance companies report the people behind shell companies on all-cash purchases over a certain level in N.Y. and Miami in order to curtail money laundering. Others, like Great Britain, increased the stamp duty on second-home purchases by 3% and raised taxes on more expensive homes in an effort to drive down demand. Few places, though, have considered responding as harshly as Vancouver, which is considering a tax on vacant homes. From the South China Morning Post:

Vancouver’s mayor Gregor Robertson says he is considering the introduction of a tax on empty homes, amid a roiling debate in the city about the role of Chinese money and offshore investors in North America’s most unaffordable real estate market.

In an interview with Bloomberg TV on [last] Tuesday, Robertson said he was “looking at new regulation and a carrot-and-stick approach to making sure that houses aren’t empty in Vancouver,” including a tax on vacant homes. “If you’re not using your property – either living in it or renting it out – then you have to pay more tax. Because effectively it’s a business holding, and should be taxed accordingly.”

There is a very substantial difference between adding to transaction costs and requiring ownership disclosures, as the U.S. and Britain are doing, and what Vancouver’s mayor proposed here. The steps taken by the U.S. and Britain either increase transaction costs or regulatory paperwork in an effort to slow demand from a certain buying segment. The Vancouver proposal takes a very different approach: it would actually increase the holding cost of foreign-owned (but unoccupied) real estate by imposing a different tax structure. This isn’t limited to the purchase transaction, instead it’s a recurring annual cost. More from the South China Morning Post:

A tax targeting vacant properties was proposed by dozens of economists in January. The [tax], which has been pitched to both the City and British Columbia provincial government, would impose a 1.5% annual tax (based on home price) on owners who either left homes vacant or had “limited economic or social ties to Canada”.

BCHAF [a proposed British Columbia Housing Affordability Fund] proponent Tom Davidoff, an economist at the University of British Columbia, said it was unclear if Robertson’s remarks on Tuesday referred to his group’s proposal. “We talked to the city and they gave us a good listen,” he said.

“I would hope that any vacancy tax would cover the bigger issue here which is not paying taxes here and not being a landlord [either],” said Davidoff, whose group’s proposal would also tax people who under-utilized properties as a “pied-a-terre”, and those whose primary breadwinner paid little or no income tax in Canada – so-called “astronaut families”.

This strikes me as the quickest way to cause an exodus of foreign capital from a given real estate market because, unlike the US and British solutions, it would not just apply to new purchases. It is also rife with the potential for unintended consequences. For example, who is to say if a property is under-utilized? Who actually gets to make that distinction and is there a hard and fast rule that could be applied. If you were a foreign (or domestic for that matter) investor or home owner who had a house there and you knew that costs were about to go up a proposed 1.5% a year based on home price (not unsubstantial on a million dollar home) would you hang around to see how it was implemented? This type of tax could send foreign investors rushing towards the exit before a glut of supply hits the market as investors seek friendlier locales in which to invest. At least it appears as if cooler heads are prevailing at the provincial and national level. Again from the South China Morning Post:

Both Canadian Prime Minister Justin Trudeau and B.C. Premier Christy Clark have said they worry that taking steps to curtail foreign ownership in Vancouver could imperil the equity of existing owners.

I hope that Prime Minister Trudeau and Premier Clark’s logic prevails as this would be an incredibly dumb way to tank a real estate market, and the collateral economic damage done to existing homeowners would be all too real. In all of the talk about how to bring Vancouver’s prices under control, it seems as if no one (or at least very few people) are proposing a real solution: relaxing restrictive zoning codes so that more units could be built to meet demand. Ultimately, that’s the only way to avoid what some are now calling a bubble. Rather, we get more of the same convoluted restrictions, subsidies and taxes that don’t solve the actual problem and often do more harm than good. The Vancouver mayor’s proposal is a tanking strategy that would make even the worst NBA team blush. Let’s hope that American cities with a large number of foreign investors don’t follow the example.

Since co-founding Land Advisors Capital of California, the predecessor to Landmark Capital Advisors in 2011, Adam Deermount, along with Steve Sims led a team that originated nearly $500 million in equity and debt commitments for projects in the Western US. Prior to Land Advisors Capital of California, Adam served as a full-time consultant on high-profile restructuring and workout projects. Mr. Deermount was an advisor to State Street Bank on the restructuring of a $550 million land and development loan. Prior to that, he served as a bankruptcy consultant to Hogan-Webb, LLC, the Chief Restructuring Officers of LandSource Holding Company, a $2.6 billion land development company owned by Lennar Homes, LNR Partners, and CalPERS.